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John J. De Goey's Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

This document is not a Government of Canada publication and is posted in the format and language in which it was received.

April 25, 2005

From: John J. De Goey
Senior Financial Advisor
Assante Capital Management Ltd.
21 St. Clair Ave. E., Suite 204
Toronto, Ont.
M4T 1L9

To: Mr. Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
L’Esplanade Laurier
20th Floor, East Tower
140 O’Connor St.
Ottawa, Ont.
K1A 0G5

Re: Recommendations for An Effective and Efficient Legislative Framework for the Canadian Financial Services Sector (Annex 6 to the 2005 Federal Budget)

Dear Mr. Salembier:

In the above Consultation Document for the 2006 Review of Financial Institutions Legislation, you invite interested parties to offer their input on a number of issues contained therein. This is my response, which includes recommendations for your consideration to include in the government’s agenda.

Prior to offering my substantive comments, I wish to note that I have already met personally with Minister Peterson on this matter and have given him a copy of my book The Professional Financial Advisor to share with his colleagues, The Right Honourable Prime Minister, The Honourable Minister of Finance and Mr. Peter Nicholson in the Prime Minister’s Office. I also had a telephone meeting with Mr. Paul Moen in Minister Peterson’s office on Friday, April 22, 2005.

National Post- My Column

In the interest of simplicity, I am forwarding some columns to further enunciate various related issues surrounding the question of enhanced consumer protection. I am therefore enclosing a number of newspaper columns- many that I have written myself- on the subject. I have a regular bi-weekly (every second Monday) column in the National Post and will be writing about a number of ideas contained in this paper in future columns beginning on Monday, May 9, 2005. Many of the individuals and stakeholder groups mentioned in subsequent columns will also be making submissions on this matter.

Overview and Context

I have included a curriculum vitae in order to provide a sense of my background. In making these comments, I want to stress that I am writing not only as a private citizen, but also as a practicing financial advisor who has a long history of involvement in the industry as an advocate for more transparent, professional and clearly-delineated relationships between retail financial advisors and their clients. As such, my comments will exclusively address the first of the three principal goals the paper enunciates, namely enhancing interests of consumers.

First, I wish to stress that I believe it is imperative that Canada have a single national securities regulator. I am in complete agreement with the government not only in the desire to have a single national regulator, but also in the rationale for doing so. Many of the more specific recommendations that follow could be more easily, purposefully and consistently applied if there were only one regulatory body in Canada.

Second, as an active participant in the so-called "Fair Dealing Model" that was originally put forward by the OSC, I wish to express my concern that the salient points of this important initiative have been substantially watered-down under the guidance of the CSA. As a rule, I have a strong preference for a more clearly delineated client-advisor relationship. If expectations were clearer, misunderstandings would be fewer.

Finally, my understanding in speaking with a number of securities lawyers is that most litigation would be avoided if the rights and responsibilities of both parties were set out with sign off prior to the professional engagement commencing. I am including a sample Letter of Engagement on the following page as an example of what that letter might entail. I might add that since April 1, 2005, it is mandatory that all holders of the Certified Financial Planner (CFP) designation use such a letter when opening accounts with new clients. Since this is already the standard procedure for CFPs, it seems natural that this document be a mandatory part of the account opening process going forward.

No matter where one looks in the financial services industry, there is an overarching sense of disaffection. Returns aside, there are many consumers who rightly feel there are ulterior motives at play when advisors make recommendations. Having spent well over a decade in the industry, I can personally attest to the litany of independence-compromising opportunities that constantly undermine the recommendations clients receive. In most cases, the primary culprit is advisor compensation.

At the end of the day, most advisors think (and more importantly, act) like entrepreneurs or sales agents while insisting they are independent, qualified professionals. Most clients are totally oblivious to this conduct, since biases are poorly disclosed- if they are disclosed at all. This non-transparency of motive hurts everyone. Meanwhile, the Canadian public has come to expect the government to protect them from undo risk. In order to assist the government in fulfilling this mandate, I am making six recommendations for your consideration. There are a number of stakeholder groups and consumer advocates who share in the goal of having the government defend consumer interests for the benefit of all concerned. The means are secondary; the end is vital.

Recommendation #1

Take steps to remove all embedded compensation from investment and insurance products.

Commissions, trailing commissions and co-op advertising dollars are often the primary motivator behind advisor product recommendations- not client suitability or performance. Simply put, there must not be any factors that allow advisors to compromise the appropriateness of their advice. The only way to be absolutely certain that there are no ulterior (compensation-based) motives at play is to remove the mere possibility of abuse. Without this removal, there will always be an incentive to recommend the products that pay more. These same products often pay more precisely because the only way advisors could be motivated to recommend them is through higher compensation. By way of example, the funds offered by Portus had a higher than average compensation structure. Many in the industry believe the product was recommended for this reason and no other. This view is necessarily anecdotal, since no one would admit to being driven primarily by compensation. By way of background, this is a recommendation that was originally made by Glorianne Stromberg a decade ago. It is a step that is conspicuously past due.

Recommendation #2

Develop a university level program that must be completed as a pre-condition for new all advisors who enter the industry. The course material should include a substantial portion that deals with matters of ethics as well as behavioural finance and other "soft" or "emotional" issues, which is where much of the true value of advice lies. This program should ultimately be made mandatory for all existing advisors.

Presently, the majority of financial advisors are people who changed careers and who had no formal academic training in the field of financial advice. The training most advisors receive is in the form knowing the ‘bells and whistles’ associated with financial products (licensing to sell) as opposed to understanding the applicability of various financial strategies (being qualified to advise). As with the previous point, the prevailing culture is one of sales rather than one of professionalism. There is considerable academic evidence that active management (stock picking and fund picking) is not a value-adding proposition. In a large majority of cases, this activity fails to add value. Most advisors are unaware of this fact because they have never been taught about the comparative merits of active and passive strategies. Poor training leads to poor advice and the advice most consumers receive is tantamount to unsubstantiated, industry-specific folklore.

Advisors are human- they give advice to the best of their ability based on the knowledge they have attained over the years. Unfortunately, much of that knowledge has been attained through licensing bodies and product manufacturers that extol the virtues of active management without fairly depicting the passive alternative. True professionals are dispassionate and impartial. This situation could be likened to allowing surgeons to recommend one procedure over another simply because it led to more income for the surgeon and/or product suppliers. As always, consumer interests should be paramount.

Recommendation #3

Clarify the role of the Investment Dealers Association and separate enforcement from advocacy.

As a simple illustration of the confusion surrounding the role of the IDA, I would point to two pieces of contradictory evidence regarding what the IDA does. On November 2, 1998, IDA President Joe Oliver said the following when giving testimony before the Senate Banking Committee on Banking, Trade and Commerce: "The IDA is Canada’s only national entity with delegated responsibility for securities regulation and investor protection." Six years later, on November 3, 2004, the IDA’s Senior VP of Regulation, Paul Bourque said the following in the National Post: "First, let’s get the facts straight. The only legislative power the provincial governments ‘delegate’ to the IDA is registration of brokers- and even that is only delegated in B.C., Alberta and Ontario. The provincial governments do not ‘delegate’ securities industry compliance and enforcement." Clearly, one of these two IDA representatives is incorrect. It would be my wish that Mr. Bourque’s interpretation of the IDA’s function be applied going forward. The IDA simply has no credibility as an enforcement agency, given that it also functions as an industry trade association.

Recommendation #4

Establish an Independent Consumer Protection Agency as a logical "next step" after Recommendation #3.

There is a widespread perception in the industry that existing dispute resolution bodies (including, but not limited to the IDA) are little more than "Kangaroo Courts" that almost always side with brokerage firms and their advisors. The IDA has a major credibility problem. The Consumers Council of Canada has recommended the formation of an independent consumer protection agency in testimony to the Ontario Standing Committee on Finance and Economic Affairs (August 19, 2004). Similarly, Democracy Watch has called for a similar body in their quest to establish an Independent Agency styled along the lines of a "Citizens’ Utility Board" (CUB). Having dispute resolution rest with a body that is effectively run by the industry serves no one and undermines public confidence. If fairness is ever going to prevail and justice done, then it is imperative that the current arrangement of the IDA guarding consumer interests be terminated.

Recommendation #5

Change the way product disclosure is conveyed by moving to a format that is more akin to disclosure made by cigarette companies on their packaging.

In listening to most industry stakeholder interests, one might think that product disclosure is a panacea of and by itself. In fact, past disclosure initiatives have proven to be more like a non-functioning placebo. The industry’s product manufacturers frequently "prescribe" disclosure as a cure-all for whatever concerns are raised in industry-wide feedback loops like this one. However, the disclosure that is made tends to be dry and full of minutia- and is often buried in the middle of a prospectus. This nearly guarantees that most people would have stopped reading before getting to the "important part".

If the industry is genuinely concerned about making meaningful disclosure, it should do so in a manner that is consistent with steps taken by the cigarette industry when it faced a similar problem. Once research came out verifying that cigarette smoke was indeed carcinogenic and addictive, the challenge was not only to convey those risks, but also to do so in a way that would eliminate the prospect of successful class action law suits being filed. Previously, successful suits had been filed on the grounds that the people using the products were unaware of the potential consequences. Better disclosure was required.

The kind of "radical disclosure" that was ultimately adopted essentially assured that law suits of that nature would prove unsuccessful going forward. The government stepped forward and made this type of disclosure mandatory by citing the larger public interest and concerns about general societal welfare.

Citizens have a legitimate right to do harm to themselves by voluntarily using damaging products, but governments have a reciprocal mandate to protect them from unwittingly engaging in this kind of behaviour- including the spread of misinformation and of incomplete information. Examples of the of disclaimers that might be used include:

  • Most actively-managed mutual funds lag their benchmark over long time horizons
  • The funds that outperform their benchmark over long time horizons cannot be reliably identified on the purchase date
  • Security selection explains very little in terms of portfolio risk
  • Passive strategies and products are usually cheaper, purer and more tax efficient that active strategies and products
  • A 1% increase in a fund’s cost (MER) would cause a $100,000 investment compounding at 9% annually to be worth nearly $100,000 less after 20 years.

Recommendation #6

Learn from the successes and failures of other jurisdictions that have grappled with the same problems.

Obviously, it is only natural that sovereign nation states might share their experiences regarding policy initiatives taken in their own jurisdictions- what worked, what didn’t work, why and why not. Canada is widely perceived as a world leader in the field of financial services and our banking and investment industries are generally held in high esteem abroad. Still, other nations are ahead of Canada in legislating policy responses to the biases (both real and perceived) that exist in the financial services industry.

By way of example, the Financial Services Authority in the U.K. made it mandatory in 2003 for financial advisors to allow consumers to pay a fee if they so desire. By making the professional paradigm of fee-based advice a mandatory consumer alternative, the FSA (by their own account) took real steps to promote the four objectives:

i) maintain market confidence

ii) promote public understanding of the financial system

iii) protect consumers

iv) fight financial crime

These four objectives would likely mirror the objectives of the Canadian Government. As such, it would likely be extremely useful to "compare notes" with the UK. You may also wish to visit: www.fsa.gov.uk for further information.


The financial services industry, if left to its own devices, would never even admit that there’s even a problem, much less recommend actionable steps to repair it. Ask most informed consumers, however, and you’ll get a very different story. The six recommendations I make are, for the most part, inexpensive proposals that can be implemented over the medium term. They would go a long way in restoring confidence in the Canadian financial system.

Furthermore, these recommendations go to the heart of the systemic challenges that have plagued the industry for well over a decade. If these steps are not taken, it is almost certain that these same problems will continue to persist decades from now. Recommendation #5 could likely be implemented by the end of 2006; recommendations #3 and #4 could likely be implemented over five or six years and recommendations #1, #2 and #6 would likely take nearly a decade to fully implement.

Consumers today are more concerned about ethics, integrity, transparency and trusting "the people in charge" than ever before. As such, I believe this government should be particularly interested in them. I would appreciate discussing these recommendations with you at your convenience. Should you have any questions or concerns, please do not hesitate to contact me. Thank you very much for your consideration.


John J. De Goey, MPA, CIM, FCSI, TEP, CFP

c.c Hon. Jim Peterson, Minister of Financial Institutions